The regulatory assault on China’s $100bn (£72bn, €84bn) private education industry could lead to consolidation in the sector, according to BNP Paribas Asset Management.
The collapse in share prices of Chinese online education firms could provide an opportunity for investors to take new positions or top up investments in tech and education companies, as the market becomes harder for competitors to enter, a report by the French asset manager argues.
The regulatory action bans after-school tutoring during weekends and holidays and reclassifies academic tutoring as “non-profit”. Online education companies will no longer be allowed to raise capital or accept foreign investment.
TAL Education, Gaotu Techedu and New Oriental Education, which are listed in New York, all fell close to 60% in the first hour of trading on 23 July in the immediate wake of the clampdown, reported the Financial Times.
BNP Paribas AM also believes that the more intense regulatory scrutiny is one of the reasons for the reversal, not only in education stocks, but also in other tech-related sectors. Apart from the education sector, China has also toughened regulatory oversight on e-commerce and internet companies as the authorities apparently try to prevent market abuse and improve oversight.
On the upside, tighter rules on anti-trust, fintech and capital markets, data security and social equality should help contain systemic risk and prevent a disorderly expansion of capital, said BNP Paribas AM, which noted that tech-related regulatory tightening is a global phenomenon, with the US authorities taking a tougher stance on social network and e-commerce platforms, for example.
Meanwhile, China’s commitment to technological progress remains undiminished, according to BNP Paribas AM. The government’s long-term objectives include a focus on technology, consumption and efficiency to drive economic growth, so it does not intend to destroy sectors integral to that policy.
Structural themes
BNP Paribas AM identifies three main long-term structural trends in China. First, technology and innovation which is supported by the size of the domestic market, higher research and development spending and a vast talent pool. The tech boom is also helping traditional industrial and manufacturing sectors.
“We see opportunities in the fields of capital goods, tech and industrial upgrading,” it said.
Second, consumption and BNP Paribas AM sees significant opportunities for leading companies in sectors such as insurance. “Thanks to rising household income, low household debt and more diversified consumer profiles, this will likely only accelerate in the next five-to-10 years.”
Finally, industry consolidation, which will be result of regulatory tightening, environmental cost pressures, higher financing costs and industrial upgrading. “Companies will focus more on research and development, productivity and costs, for example those in the new economy sectors.”
“We believe these investment themes will stand the test of time regardless of covid or Sino-US trade tensions,” the asset manager said.
However, there are short-term risks. Large internet companies could come under further scrutiny, and the launch of the digital renminbi may undermine leading e-payment players.
It is also unlikely that tightening credit conditions in the property sector will be loosened any time soon, mostly because of still high debt levels, potential social concerns resulting from increasingly expensive housing as well as the ever-higher cost of raising children.
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